Did a doctor's record-access charge enter a photocopy service's taxable sales price when the service passed it through to the customer without markup?

Plain-English summary

A small photocopy company obtained medical files from doctors, selected the records requested by lawyers or insurers, copied them, and separately listed page charges, location stops, work-order charges, and doctors' record-access charges on its invoices.

California included the doctors' access fees in taxable gross receipts. They were direct expenses incurred to obtain the records needed to fill the company's retail copy order.

Passing the fees through without markup did not change the result. Sales price and gross receipts included expenses such as materials, labor, services, and access costs without deduction.

The hearing officer noted that a different structure could produce a different expense pattern: if the customer dealt directly with and paid the record owner, the access fee would not be the copy company's expense. But tax consequences followed the transaction actually used.

The recommendation redetermined the assessment without adjustment.

What this means for you

Copying services and record requesters

A reimbursement can remain taxable when it repays the seller's own cost of completing a taxable copy sale.

Accountants and tax professionals

Identify who contracts with and pays the custodian, whether the fee is the seller's expense or the customer's direct obligation, and how page, travel, work-order, retrieval, and access charges relate to the sale.

Common questions

Q: Was the doctor's access fee taxable?

A: Yes.

Q: Did passing it through without markup make it exempt?

A: No.

Q: Could direct payment by the customer change the analysis?

A: The source said it could because the fee then would not be the photocopy company's expense.

Citations and references

• California Revenue and Taxation Code §§ 6011 and 6012
• California Sales and Use Tax Regulation 1528(a)(2)

Source

• Annotated Legal Opinions collection: CDTFA Annotated Legal Opinions
• Annotation page: Annotation 515.0190
• Original supporting opinion: 515.0190 PDF

Original ruling text

515.0190
STATE OF CALIFORNIA
BOARD OF EQUALIZATION
In the Matter of the Petition for
Redetermination of State and Local
Sales Tax;
REDACTED TEXT
Petitioner.

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DECISION AND RECOMMENDATION
No REDACTED TEXT

The above-entitled matter came on regularly for hearing on Friday, May 27, 1977 in Pasadena, California. Robert H. Anderson, Hearing Officer. Appearing for Petitioner:

Ms. REDACTED TEXT, Owner

Appearing for the Board:

Ms. Rebecca L. Jones, Auditor
Van Nuys District

Protest
Pursuant to an audit covering the period from 10-1-74 through 7-31-76, and a determination issued on December 9, 1976, petitioner protests the assessment of sales tax on gross receipts from certain charges made in connection with the sale of medical records copies. The measure of the tax is $REDACTED TEXT as follows: Location Stops, Work Orders, and Copy Charges netted from total sales Location Stops, Work Orders, and Copy Charges claimed as exempt labor

$REDACTED TEXT
REDACTED TEXT
$REDACTED TEXT

Contentions
The copy charge portion of the audited liability represents charges made by doctors for furnishing patient’s medical records to be copied. This amount is paid and recovered by passing it on to the customer without any mark up. Petitioner believes the copy charges represent fees advanced on behalf of customers who reimbursed petitioner for them when billed for the copies of the medical records. Summary Petitioner was the sole proprietor of a very small photo copy business that commenced on or about October 1, 1974. The business consisted of producing copies of medical records for lawyers and insurance companies generally. There were no audits of the business other than the one under consideration, and it was initiated because petitioner sold the business.

515.0190
Invoices to customers contain a breakdown of the various charges including sales tax. Following is an example of one invoice: 188 pages @ .35 Sales Tax

$61.80
3.71

4 Location Stops @ 5.50
Work Order Charge

22.00
17.60
105.11
5.00

Copy Charge
Total

$110.11

Petitioner charged tax on the billings for the pages only, but does not protest the assessment for tax on receipts from charges for “Location Stops” and “Work Order Charges”. Location Stops are just what the words imply; they are the places where petitioner had to go to obtain possession of records to be copied, and include doctor offices, hospitals, clinics, etc. Petitioner makes a flat charge for each stop regardless of how far or near the location is to her base of operations. Work Order Charges are for time to phone and set up appointments to obtain records, time to put the records in order for copying, delivery to the customer, time to get microfilm of the records copied. Copy charges represent amounts charged by doctors for use of the records. The doctors do not render any service in connection with furnishing the records, they merely make a charge to petitioner for the use of them. The use being the copying of them. The customer who wants the copies of the records specifies what is needed, and petitioner obtains the entire file of records which often includes some not needed. Thus, petitioner picks out what is needed and copies it. Conclusions Regulation 1528 (18 Cal. Admin. Code 1528) subsection (a)(2) provides, in part, as follows: See amendments to Reg. 1528 esp. 1528(b)(2)(A). SPJ 12/14/01

Persons engaged in producing photostat copies of medical records to the order of customers are the retailers of photostats produced, whether or not the copies are produced at the business of the taxpayer or at a medical office, hospital or other field location. The tax applies to the entire charge for the production of the Photostat copies without deduction for expenses incurred in obtaining access to the records, travel time, time spend in selecting the particular records desired, the field service of photostating or microfilming the records or any other costs or expenses of filling the customer’s order. Underlines added.

515.0190
Section 6011 of the California Sales and Use Tax Law contains the definition of “sales price” which provides, in part, generally that it means the total amount for which tangible personal property is sold without any deduction on account of the cost of the property sold, the cost of materials used, labor or service cost, interest charged, losses, or any other expenses. Section 6012 of the law contains the definition of “gross receipts” which provides, in part, generally that it means the total amount of the sale price of the retail sales of retailers without any deduction on account of the cost of the property sold, the cost of the materials used, labor or service cost, interest paid, losses, or any other expenses. The charge made by doctors for use of the records is a direct expense in connection with making copies of them. The fact that petitioner does not elect to mark up that expense and instead passes it on to the customer makes no difference. It is nonetheless one of several expenses and is what the Legislature meant to be included in “sale price” and “gross receipts”. It is true, the customer might have dealt directly with the owner of the records in obtaining them for copying and paid the owner directly. Were this the case it would not be an expense connected with the retail sale of the records and therefore not an expense of petitioner; but that is not the way business was conducted. It is well established that tax consequences result from what did, in fact, happen, not what might have happened if a taxpayer chose a different method of carrying out a given transaction. In summary, the charge made by doctors for use of the records is an expense incurred in obtaining access to the records, and the Regulation expressly calls for the inclusion of expenses incurred in obtaining access to the records in the gross receipts from sales of them. Recommendation Redetermine without adjustment. Robert H. Anderson, Tax Counsel

June 6, 1977
Date

Reviewed for Audit:

Principal Tax Auditor

Date